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ESG Challenges in the Construction of UK Balanced Portfolios for Private Investors: An Analysis of the Availability and Performance of ESG Funds Across Various Asset Classes

Author

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  • Jacob H. Schmidt PhD
  • Charlie McCann

Abstract

Environmental, Social and Governance (ESG) and sustainability investing have become very popular with institutional, family office and more recently, retail investors. In the UK the range of ESG and sustainable funds for retail and high net worth (HNW) investors is still relatively small but growing fast. This paper studies both the supply side and risk-adjusted performance of ESG funds for UK retail investors.  Based on secondary data from the Financial Express (FE) Analytics database the authors find that funds in the equity, bond and multi-asset sector are investable, from qualitative as well as quantitative perspectives, but property, alternative and other asset classes are still underdeveloped. Choosing ESG objectives has provided better risk-adjusted returns over the long-term for the retail investor, but with a tilt towards the quality growth factor as ESG favors these sectors over typical old economy value. These findings are robust with top quartile rankings and the consistently higher Sharpe ratios over a 3-year period for the equity sectors. Due to the scarcity of bond funds and other diversifiers, portfolio construction is constrained. The authors predict that over time, availability of ESG funds in alternative asset classes will grow in line with demand.JEL classification numbers: D61, G11, G14, G51, M14.

Suggested Citation

  • Jacob H. Schmidt PhD & Charlie McCann, 2022. "ESG Challenges in the Construction of UK Balanced Portfolios for Private Investors: An Analysis of the Availability and Performance of ESG Funds Across Various Asset Classes," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(1), pages 1-6.
    • Handle: RePEc:spt:apfiba:v:12:y:2022:i:1:f:12_1_6
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    More about this item

    Keywords

    Sustainable; Investment; ESG; Asset Management; Wealth; UK; Retail.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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